Jan 9, 2013

Vietnam - Firms evade taxes through transfer pricing

VietNamNet
Bridge – Tax authorities have recently
audited some foreign-invested enterprises suspected of evading taxes in Viet
Nam through transfer pricing. Vietnam News Agency spoke to the director of the
Ministry of Finance's Department of Tax Reform and Modernisation, Nguyen Quang
Tien, about the issue.Why do you suspect transfer pricing is being used as a tax evasion
technique?

A big problem facing tax authorities has been the rising number of
foreign-invested enterprises declaring losses. Their statistics suggest that
total tax collections from such firms haven't been commensurate with their
investment capital for a number of years.

As of December 20, there were 11,110 foreign-invested firms, compared to 7,400
State-owned enterprises.
However, the tax contributions of foreign-invested firms accounted for only
10.2 per cent of the total State budget in 2008, compared with 16.7 per cent of
State enterprises. Taxes collected from foreign firms in 2009 and 2010 accounted
for about 11 per cent of the State budget, while taxes paid by State
enterprises accounted for 19-20 per cent.

The difference was partly because foreign-invested firms are beneficiaries of
preferential corporate income tax policies during their initial years in
operation in Viet Nam. However, some companies have been using transfer pricing
once their investment incentives expire to evade further tax obligations.

How does transfer pricing work?

Audits have shown that foreign firms often deduct raw material costs at much
higher than their actual values while reporting lower values for their finished
products. They also give their products specific characteristics or associate
them with other transactions to avoid detection by tax authorities.

How do you detect the practice?

The most common signs of transfer pricing are that firms declare losses for
many consecutive years while still expanding their investments in Viet Nam and
conducting significant business transactions in other countries.

However, controlling transfer pricing is difficult since it requires the tax
agency to have the professional skills and the authority to investigate it. The
co-ordination between State agencies also remains loose and ineffective.

Furthermore, the country hasn't regulated reasonable profit levels for each
industry. It has been difficult, for instance, to determine market prices for
products since information exchanges between Vietnamese and foreign tax
authorities remain limited by the goal of each country to protect its tax base.

Which measures have been taken by the tax authorities to prevent the
transfer pricing of FDI firms?

Viet Nam's long-term goal is to create a healthy investment climate to attract
foreign investors. We are currently focusing on building a database to try to
minimise transfer pricing. Tax authorities will buy the data, especially that
related to parent companies of foreign-invested firms in Viet Nam, to serve for
the task.

The General Department of Taxation is also researching an application for risk
analysis and audit of transfer pricing.

In the future, tax agencies will
also focus audit efforts on foreign groups which have many subsidiaries and
show signs of transfer pricing. Particularly, tax agencies will inspect
distribution systems of exclusive importers and distributors on the Vietnamese
market whose raw materials are sourced entirely from associated companies
abroad.

In addition to issuing regulations to guide the execution of the revised Law on
Tax Management approved by the National Assembly late last year to better
manage transfer pricing, the General Department of Taxation will also
streamline the current legal framework related to transfer pricing.

The department is also co-operating with the European Commission Delegation in
Viet Nam, the Organisation for Economic Co-operation and Development (OECD),
Japan International Co-operation Agency (JICA) and World Bank to provide
training programmes General Department of Taxation staff.

Source: VNS

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